Sustainability credentials front and centre for BTR investors

Build-to-rent has now established itself as an extremely attractive UK investment class, having demonstrated that the income offered is both highly secure and shows long term appreciation – a rare and valuable commodity in today’s world.

Indeed, high occupancy and rent collection levels have been delivered throughout the pandemic, further confirming the durability of BTR income. Knight Frank’s monthly benchmark survey of leading operators (accounting for more than 22,500 operational units across the UK) suggests monthly rent collections have averaged close to 96% since March 2020.

The focus for many investors remains on aggregating to scale, with significant attention being given to product evolution – including specification, amenity offering, durability of fit out and digital connectivity. With these considerations at the fore, sustainability and environmental credentials have typically been a secondary concern.

However, the environmental impact of BTR schemes is rapidly moving up the agenda, with some investors now putting sustainability credentials front and centre of investment decisions. A number of leading investors in the sector are making a conscious effort to innovate and evolve their approach to investment, which is helping to drive improved performance of buildings.

Investors at the fore

For example, Invesco recently became the first investment manager to submit a portfolio of residential assets for the BREEAM In-Use Residential Certification scheme. This scheme is the first of its kind, and will now allow landlords to benchmark the sustainability performance of their operational build-to-rent assets.

Elsewhere, L&G is also making a stronger commitment towards implementing a robust ESG framework into its developments, enhancing its commitment to becoming more sustainable. For example, it has recently introduced an ambitious company-wide target of becoming operationally carbon net zero by 2030 – 20 years ahead of the Government’s own carbon net zero target of 2050.

A further example is Aberdeen Standard, where investments must now meet certain key ESG criteria in order to be approved by the company’s investment committees.

Avoiding obsolescence

This increased commitment from leaders across the industry demonstrates the wider significance and importance of the ESG agenda. There is also now a growing focus on ‘future proofing’ assets to ensure maximum liquidity of investments in the years ahead. Central to this, is reducing risk of obsolescence triggered by future regulation change or shifts in tenant sentiment and preferences.

Over the past year we have seen an increase in the number of investors in the BTR market who are explicitly prepared to pay a premium for schemes with strong environmental and sustainability credentials.

The residential investment sector has long lagged behind its commercial counterparts in applying and benchmarking stringent sustainability standards to properties. The launch of the BREEAM In-Use Residential Scheme last year is a significant step forward for measuring the buildings operational sustainability credentials.

Investors are now also rightly beginning to consider their construction methodology and materials, although – especially in many regional markets – construction costs remain the limiting factor for greatly improving the sustainability of BTR in the short term. In these circumstances, it is likely that only significant legislation change will deliver material improvements.

Homes for the future

From a legislation perspective, the Government has now set out its approach to achieving net zero carbon through the Ten Point Plan, published in November 2020. Among other targets, it dictates that new developments will need to include low carbon heating systems along with suitable walking and cycling routes, and electric car charging points. Alongside this, the Future Homes Standard will require a 75-80% reduction in emissions in new build homes by 2025, with an interim uplift in building regulations taking effect from June 2022.

For many, the key question is whether sustainability credentials of BTR schemes is really an important consideration for tenants. Many investors remain unconvinced that this is high on tenant priority lists, or indeed that it will command increased rents or improved occupancy at present.

While there is some evidence that these considerations are moving up the agenda from a tenant perspective, there remains limited quantitative data to help guide investors decision making.

Knight Frank is very pleased to have recently consulted with HomeViews on surveying renters within BTR accommodation to understand what sustainability features are important to them. We anticipate the results will show that tenants do increasingly value the environmental and sustainability credentials of the buildings in which they live.

If this is the case, in the long term, buildings with poor environmental ratings could become less desirable in the eyes of the tenant – which could have a knock-on effect on profitability. Equally, we expect to see that the very best buildings will help drive greater tenant retention, demand and, ultimately, income resilience in the future.

This blog was originally published on ReactNews

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